Economic Foundation of Dictatorship in Resource Exporting Economies

Abstract

This paper explains the lack of democratization in resource exporting countries
using a two period resource extraction model. There are two classes of agents: elite
who own capital and natural resources and citizens who own labor. The elite announce,
in the rst period, their plans for resource extraction and investment in the economy.
Citizens, in the second period, decide whether to conduct a revolution against elite
to capture their share of rents from un-extracted resources. Government policies are
designed to ensure that the elite remain in power and that citizens do not have the
incentive to revolt. These policies subsidize extraction and investment during the rst
period. The extraction subsidy reduces the benet of revolution while the investment
subsidy increases its cost. On the other hand, policies in the democracy case are not
constrained by the revolution threat and represent the median voter preferences. The
resource is over extracted in the non-democratic case compared to the democratic case.
Also, investment in the non-resource sector is lower. The important nding of the model
is that extraction path goes against price signals; rst period extraction increases with
the increase of the resource price in the second period. Non-Democratic institution is
the rational choice of the elite even with the costly policies to prevent a revolution.